Real rates increased while expected inflation did not (yet) move

Since December 2020 US long term nominal yields (US Treasury 10y) rose 60 bps, while expected inflation (US Inflation Swap 5y5y) remained flat at ~2.2% Markets incorporate a benign outlook, but inflation will pick up significantly over the next quarters based on statistical effects (y-o-y comparison) and cyclical forces (economic recovery, lower unemployment, higher commodity prices) Therefore, we expect bouts of market volatility as rates tend to rise and equity multiples to shrink.

nominal yield = real yield + expected inflation

The US Fed announced that it will tolerate a temporary inflation overshoot above 2% with its recently implemented “average inflation targeting” framework Nevertheless, should ” inflation move towards 3% or beyond, bond and equity markets will be challenged.

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